As we enter the 2020 marketing year it can be practically guaranteed that the next 12 months will be anything but normal. Remember when a US presidential election was the only thing we had to worry about? This year its vastly different. I’m sure everyone is well aware of the NOV 3 US election, covid 19, political unrest and a nasty trade war between the western world and China. However, the news is not all bad for Canadian farmers if you are paying attention and using the tools available to you.
Globally it looks like the majority of crops are in relatively good shape and there doesn’t seem to be any global wreck. It seems like the world will be producing roughly the same amount as it did last year. Generally speaking, there is strong demand to offset these large supplies which in turn will keep commodities prices in check.
The political climate is on the wrong side of stable, which means anything can happen at any time to anyone. So, in 2020 this could be our number one fundamental. Pay attention.
At some point the world will have to pay the Piper. With the amount of “money” that is being created out of thin air at some point there is going to be some serious inflationary pressure. (Chart 1) This is why I believe that we must pay attention to what is going on in the precious metals markets and also the commodity markets. One of the reasons for this is because those asset classes work as a hedge against inflation – smart money know this. I’m not talking about media money (media hype, perma Gold bugs, etc.) I’m referring to smart money. What are the people like Ray Dalio & Jim Rogers doing?
I personally think bottom is being carved out in Ag Commodities. In fact, we are seeing this right now with corn and wheat. Currently these products are extremely cheap, and I think a floor price is being established. As we bounce along this floor don’t expect any major rallies but rather a flat market with dips that aren’t very big or long. With the current S&D one should expect the prices to be range bound until something changes the fundamentals. By understanding the macros and micros we infer where these prices are headed for the next 12 months.
As we roll into harvest 2020 there is a lot coming down the pipes. Like everything 2020, Western Canadian crop production is all over the map. Down in southern Alberta the crops are amazing and apparently one would have a hard time distinguishing between irrigation and dryland. Move up north and that land literally looks like fish habitat.
Risk To Reward Management:
Luckily, most crops in Canada are still returning positive returns. That low grade malt barley at $5 bucks - that makes money. 10.50 Canola makes money. Even $7 yellow peas at 65 bu/ac makes $455/acre which had better be below your cost of production.
As smart marketers there is only one thing to do. And that my friends is to take the financially profitable asset and deal with it. You need to take the money off the table when it’s there. Watching $500 canola futures come and go without doing anything is simply playing with fire. Basically, since Jan 2020 there has been a couple of times to grab 10.50 off the combine and that my friend is simply good money.
While not everyone is comfortable pre booking grain there still needs to be some sort of plan in place. One thing that should be done before the grain is harvested is a bit of a rough draft of where the money is going to come from. Is it coming from wheat in the fall and speculate on the spring canola price? Or perhaps, it’s time to recognize that the world wheat ending stocks to production ratio is at 41%; the highest its ever since 1960. (Chart 2) This fact alone should change the way you go about marketing wheat. Perhaps this year it’s best to sell the carry in the market and expect the futures to go nowhere. As professionals we need to ask these questions. We may not like the answers, but hey live in the commodity world.
Regardless of your strategy it’s 2020 and anything can happen. To quote the “great philosopher” Mike Tyson, "Everybody has a plan until they get punched in the mouth." Joking aside, he didn’t get to be one of the great boxing legends by just sitting around and hoping for the best. He trained and trained and trained some more.
I decided to pick on canola this time because it has the most opportunity right now.
Really at today's price the only real question that needs to be asked is what would cause canola to rally up to the next leg? Likewise, the same must be asked for soybeans and what would cause them to rally from 9 to $10/bu. The reality is that soybeans and canola almost always track together. Outside of some really wonky Canadian fundamentals this is really a soybean question. In short what would cause soybeans to rally up a buck a bushel. Again, it’s 2020, it’s anyone guess. For beans to rally there needs to be a change in the S&D. This year they are expecting production to be record at 370,399 MMT, yet the ending stocks to production ratio is expected to drop from 28% to 26%. Since 2000 the average ratio is 25%. At the end of the day there can be a case made for a slight rally in the beans. Although, beans may have some potential it probably isn’t enough to push canola the next level which is roughly 520/mt.
The next question that needs to be asked is why has canola diverged in the term of price performance when compared to soybeans. (chart 3) Well it seems that the demand for canola is extremely strong from both China and Europe. This is probably the reason why canola has rallied to the top of its current range. This means that outside of the soybean market rallying, canola will probably not go much above $500/mt on the nearby futures because of product arbitrage.
Putting the pieces together it seems that the Canadian canola crop will be above average, but not a bumper like some claim. Overall, it looks like the Canadian S&D on canola will be relatively tight. Again the ending stocks to production ratio is about 7%. Down from 12% last year. Now if you believe the Farmlink numbers of 20.6 MMT that came out last week then the ratio goes to roughly 15% which would tank the canola price so fast that 9.50 would be a super good deal. Regardless, there is a crop coming and demand is strong, supply seems like it will be pretty good. There is really no reason for soybeans to rally significantly and hence canola futures to follow.
On the cash side, new crop basis levels have remained his historically average. This tells me that Cargill and other guys are not expecting a bumper crop, yet they are anticipating solid demand going forward. Overall, these market conditions are an excellent opportunity to take some money off the table and lock in a profit. Because unless soybeans do something or you want to store canola until the summer of 2021, then now is the time to take advantage of these prices. Today’s price is excellent and if you are not making money at these prices then you have bigger problems.
Charts and Graphs Chart 1
It makes perfect sense that when the money supply is increased then that money will find a home. As money supply goes exponential so do stocks. History says that asset classes can’t go exponential forever and at some point the whole thing collapses under it’s own weight. We just don’t know when or how.
Call to action
the number one thing you can do is give Greg at Insight Ag Marketing a call. Because effective marketing is super important. It’s like going from 40 bushels/acre to 50. it’s a big deal.